The Committee of Public Accounts (PAC) said optimistic budgeting had resulted in costs soaring from £4 billion during the bidding process to £9.3 billion in March 2007.
The Department for Culture, Media and Sport and the Olympic Delivery Authority (ODA) were criticised for omitting security, tax and contingency costs in the initial estimate and over-estimating the role of the private sector.
"It is now clear that the estimated cost at the time of the bid ... was entirely unrealistic," Committee chairman Edward Leigh said in a statement.
"It ignored foreseeable major factors such as contingency provision, tax obligations, and policing and wider security requirements.
"At the same time, the estimate of the extent to which the private sector would contribute funding towards the Games has proved little more than wishful thinking."
Despite Treasury guidance to include contingency provision, it was omitted in the initial estimate, the Committee said.
When it was included in March 2007, it amounted to £2.75 billion.
Tax liabilities of £836 million also needed to be added to the 2007 bill.
The initial budget also left out the £600 million needed for policing and security.
The public sector was initially supposed to contribute £3.4 billion, with the private sector providing a further £738 million.
But the private sector contribution has been revised downwards to £165 million pounds, less than two percent of the total funding, the Committee said.
The public funding requirement has risen by £5.9 billion - to be paid by the Exchequer and the National Lottery.
The committee also criticised the lack of detail about the Games' legacy.
Failure to provide such information could result in the public losing confidence in the Government's ability to deliver the Games within the new higher budget, the MPs added.
ODA Chief Executive David Higgins said: “A great deal of progress has been made since we gave evidence to the PAC last year.
“We have completed demolition on the main venue sites and will start construction three months early at the end of May.
"We are locking down contracts with world class UK firms to build Games facilities and recently signed contracts for the Olympic Stadium and Aquatics Centre.
"We believe we have a realistic budget and adequate contingency and are confident that we can deliver within it.
"We will allocate contingency to manage risks as we go forward as is common for any project of this scale and complexity.
“Of every pound, 75p we are spending is for long term regeneration so there is a very clear legacy for the project – world class sporting facilities, thousands of new homes, schools, community and health facilities, new transport links and utility infrastructure, all in a brand new urban park.
“Early signs on the economic and social benefits are also encouraging - over one in ten workers on the Olympic Park workforce were previously unemployed before finding work helping deliver the Games and over a third of these workers live locally.
"Earlier this year we also launched an innovative 'business dating agency' for businesses, to help more companies access thousands of future London 2012 related business opportunities.”
Olympics Minister Tessa Jowell said much of the MPs' report focused on the early stages of the budget planning, much of which took place three or four years ago.
She said: "This report focuses principally on the early stages of the planning of the budget for London 2012, much of which took place three or four years ago.
"A lot has changed since then and there is clear progress to report.
"Construction of the Olympic Stadium will start later in the Spring, three months earlier than planned, the site for the Athletes’ Village has been cleared and a crucial early project to dig huge tunnels to carry underground power lines has been completed on time and on budget.
"And the legacy from staging the Games has been built into our plans from the outset and remains central to everything we do.
"We welcome the Parliamentary scrutiny from the Public Accounts Committee and are working with the National Audit Office to ensure value-for-money at all times.
"And, as I confirmed to Parliament in December, the funding package announced in March 2007 remains unchanged and robust.
"This is a complex project both in terms of a fixed deadline – we know the immovable date of the Opening Ceremony - and because of the state of the site, some 500 hectares of heavily contaminated land.
"There is no room for complacency and we remain vigilant about costs, but we are heartened by progress so far and the International Olympic Committee’s view that we are ‘operationally and financially’ on track.”
photos Janos Schmidt